Don't overlook this tax credit for saving

Businesswoman putting money into 401K jar at desk
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If someone offered you free money, you'd take it, right?

Apparently not, or at least not when it comes to tax credits.

Only 1 in 4 Americans who are eligible for the retirement saver's tax credit are even aware of it, according to survey data from the Transamerica Center for Retirement Studies.

Perhaps that's because the average claims are not large: They came to $215 for joint filers, $165 for heads of households and $127 for single filers as of 2012, according to the IRS. But the claims totaled $1.2 billion, and with awareness so low, that suggests billions of dollars in credits are going unclaimed.

"Most people don't like to think about taxes, even when there is a credit involved," said Catherine Collinson, president of the center. "Whereas people are very familiar with the ability to save for retirement on a tax-deferred basis, it sounds almost too good to be true that they could also get a credit for saving."

The saver's credit is aimed at people with low and moderate incomes: for 2016, the benefit begins phasing out at incomes above $18,500 and disappears for incomes above $30,750. (For married couples filing jointly, the credit starts diminishing above $37,000 in adjusted gross income, and goes to zero for income above $61,500.) Still, with median household income in 2014 at $53,657, millions of Americans are potentially eligible.

Some of those people may be recent college graduates just beginning their careers, said Alison Flores, principal tax researcher at The Tax Institute at H&R Block. "It could certainly help a millennial."

Others may be part-time workers, or people who lost lucrative jobs during the year. Also, "since women continue to earn less than men, women are somewhat more likely to be eligible," Collinson said.

To qualify for the credit, you have to show that you contributed to your retirement savings. But that contribution could be to an IRA, a company sponsored plan like a 401(k), or to a MyRA account, the retirement savings account recently created by the Treasury Department for people without other options to save.

Others who might be eligible for the credit may have incomes so low that they do not file a tax return, said Flores.

Another reason for not taking the credit is that some eligible taxpayers may be using IRS Form 1040EZ, where the credit does not appear. And that form comes with a whopping 44 pages of instructions.

"It's conceivable that not everybody gets through the 44 pages," Collinson said.

By contrast, awareness of some other tax credits, such as the child-care credit, is relatively high, Flores said. Yet about 20 percent of eligible workers fail to claim the earned income tax credit, she said. According to the IRS, the average amount received for that credit was over $2,400 in 2015.

Tax calculator
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While taxes are no fun for anyone beyond accountants, the IRS does attempt to make it easier for taxpayers with moderate incomes to receive good tax advice, offering free commercial tax preparation software to taxpayers with incomes below $62,000.

Providing the software is helpful, Collinson said, but taxpayers hoping to use the saver's credit may need to do more.

"The key for people who are eligible for the saver's credit is to be on the lookout for it," she said. Make sure to use the correct tax forms, and if you want to spread awareness, "tell your family. Tell a friend — that can go a long way."

— By Kelley Holland, special to CNBC.com